Staying The Course on Gymboree Following Strong Earnings Report

Children’s clothes retailer and our June investment newsletter pick Gymboree (GYMB) reported results Wednesday night that not only beat net income estimates by four cents a share, but also the company also raised its full year 2007 forecast to $2.50 to $2.53 per share from an earlier forecast of $2.42 to $2.46 per share. Overall sales increased 20%, same-store sales increased 5% and even gross margins increased when compared to the same quarter last year.

Compare this with results from competitors Children’s Place (PLCE) and Carter’s (CRI), who reported losses for the second quarter citing a challenging retail environment and lackluster sales at Carter’s OshKosh division. In fact Children’s Place lost more ground Thursday after cutting its profit outlook and mentioning that its Disney licensing agreement may be in jeopardy. Children’s Place has lost almost 40% of its value over the last two months.

Given these results, one would have expected Gymboree to open much higher Thursday, but unfortunately this was not the case. The stock not only dropped in after hours trading Wednesday, it also opened lower Thursday. I can only attribute this to a generally weak retail environment and the fact that the stock was up 4.85% Wednesday in anticipation of quarterly results. Investors were probably also not pleased with the company’s forecast of low to mid single digit sales growth at stores that have been open for at least one year (same-store sales is an important retail metric).

With a challenging housing market dampening the binge buying habits of consumers, the retail environment is indeed challenging and I applaud Gymboree for forecasting growth in this period of uncertainty. It looks like investors eventually saw the light of day and the stock is now up 1.73%.

A subscriber wrote to me this morning asking if I planned on staying the course with Gymboree. I told him that based on the results, I see absolutely no reason for selling our position and plan to continue holding it both in my personal portfolio and the SINLetter model portfolio for the near future. From a valuation perspective, this company which has no debt on its balance sheet, and still looks very attractive to me. The key risk to monitor is consumer spending and investors have outstanding visibility when it comes to retailers like Gymboree as they report sales results every month.